1.  Benefit fraud is a crime and undermines public confidence in the benefits system. The Department for Work and Pensions (the Department) has a well-defined strategy for targeting benefit fraudsters. Of the Department's 110,000 staff, around 4,000 (4%) work directly in counter-fraud activity. In 2006-07, the Department reportedly spent some £154 million on tackling fraud against total benefit expenditure of £120 billion. The Department assesses its progress in tackling fraud by using a sampling technique to estimate the total level of fraud in the benefits system.[3]

2.  The estimated level of benefit fraud fell from £2 billion in 2001-02 to £800 million in 2006-07 (Figure 1). A considerable part of this reduction—some £700 million—occurred when the Department concluded that overpayments of Disability Living Allowance and its related benefits should no longer be considered as fraudulent.[4] Estimated fraud now accounts for 0.6% of total benefit expenditure, although the level of estimated fraud as a percentage of expenditure ranges from 2.3% for Income Support and Jobseeker's Allowance to zero for the State Pension.[5]

3.  In 2006-07, the Department identified £106 million of fraudulent overpayments in return for the £154 million it spent on counter-fraud activities. This means that the Department spent approximately £1.50 to identify every £1 of fraudulent overpayments. The Department does not consider that the amount of identified overpayments is an accurate reflection of the total impact of counter-fraud work. The measure does not take account of the deterrent effect of Departmental activity or the amount of benefits that would have been overpaid subsequently if departmental staff had not stopped the fraud.[6]

4.  The Department is not complacent about reducing the level of fraud even further, but believes that it might be more cost-effective to devote any additional resources to tackling customer and official error instead. While fraud has fallen since 2001-02, customer and official error rose in the same period from an estimated £1 billion to £1.9 billion. For example, reported official error on Housing Benefit has increased by around a quarter to 1.4% of expenditure. In January 2006, the Department established an official error reduction taskforce although levels of official error have yet to go down significantly. The Department has reported that the taskforce is now correcting £2 million of weekly errors. The Department's error reduction strategy, launched in January 2007, includes a target to reduce error by £1 billion by 2012. The key strands of this strategy include:

• stopping error from entering the system in the first place;
• ensuring that customers and staff comply with benefit rules; and
• using data matching to identify high value errors that have already entered the system.

The Department accepts the conclusion of the National Audit Office report on dealing with the complexity of the benefits system that benefit rules can led to high error rates.[7] It expects its current initiatives to reduce error, but believes that it is too early yet to see the full impact.[8]

Figure 1: Levels of Fraud and Error in 2006-07

	EXPENDITURE	FRAUD		ERROR
				OFFICIAL ERROR		CUSTOMER ERROR
	£M	£M	%	£M	%	£M	%
REGULARLY REVIEWED
Income Support	9,100	210	2.3	130	1.4	160	1.8
Jobseeker's Allowance	2,500	60	2.3	50	2.1	10	0.4
Pension Credit	6,900	110	1.6	160	2.3	90	1.3
Housing Benefit	14,900	150	1.0	210	1.4	420	2.8
PERIODICALLY REVIEWED (DATE OF ESTIMATE)
Disability Living Allowance (2005)	9,200	40	0.5	70	0.8	60	0.6
State Pension (2006)	53,700	0	0	60	0.1	40	0.1
Carer's Allowance (1997)	1,200	50	3.9	10	0.6	10	1.0
Incapacity Benefit (2001)	6,600	10	0.1	90	1.3	20	0.2
Instrument of Payment fraud (2006)	n/a	10
Interdependencies (2005)	n/a	10		10		10
STATISTICALLY ASSESSED
Council Tax Benefit	3,900	30	0.9	50	1.3	100	2.5
Other unreviewed benefits	11,800	70	0.6	80	0.7	60	0.5
TOTAL	119,800	800	0.6	900	0.8	1000	0.8

The value of fraud was highest in Income Support and Housing Benefit during 2006-07, and overall was 0.6% of total benefit expenditure. However, levels of official and customer error combined are greater than fraud at around 1.6% of expenditure.

Source: Department for Work and PensionsNote: As part of the C&AG's audit of the Department's accounts, including the estimate of fraud and error, the National Audit Office reviews the Department's approach to sampling and the methodology applied in checking, including re-performance of a sample of items. The National Audit Office also reviews the processes for interpreting the data and generating estimates of error and fraud. As a result, the C&AG is satisfied that the figures reported by the Department are the best estimates available.

5.  The Department's method of measuring the level of fraud and error compares favourably with that of similar agencies in other countries. Research by the National Audit Office in 2006 did not find another organisation that uses a rolling measurement system to estimate the scale of loss.[9] Some degree of subjectivity is inevitable when estimating fraud levels. In order to measure its progress and to act in individual cases, the Department must use its judgement to decide whether overpayments occur due to fraud or error. While it is generally easy to identify official error, it is harder to separate fraud and customer error because the Department must judge whether the customer had fraudulent intent. The Department told us that it does not arbitrarily reclassify fraud as error, and that both internal scrutiny and National Audit Office reviews act as controls on the decision-making process. When the Department reclassified Disability Living Allowance overpayments (see paragraph 2 above) it did so after consulting the National Audit Office and the matter was reported in its annual accounts.[10] The Pension, Disability and Carers Service (previously the Disability and Carers Service), which administers Disability Living Allowance, has enhanced its checks and controls designed to ensure that customers now receive the correct amount of benefit.[11]

6.  The Comptroller and Auditor General has given a qualified opinion on the Department's financial accounts for the last 19 years due to the estimated levels of fraud and error. The Department believes that its accounts will continue to be qualified if the Comptroller and Auditor General applied the criteria that no more than 1% of payments should be incorrect.[12] It would prefer that there was a stretching yet attainable target that would motivate staff to improve performance, but accepts that it is not feasible to remove the qualification simply by raising the threshold on incorrect payments. The Department continues to discuss possible solutions with the National Audit Office, and has suggested one way may be to set different criteria for different benefit streams.[13]

4   People are eligible for Disability Living Allowance if they have difficulty with a range of everyday activities, such as walking outdoors or getting dressed and undressed. In 2004-05, the Department acknowledged that some customers' circumstances changed so gradually that they could not reasonably be expected to recognise the potential impact on their benefit claim. The Department decided that the resulting overpayments to these customers should not be classed as fraud or error.  Back

5   Qq 2, 3, 18-21, 131-139; C&AG's Report, para 1.1; Figure 3  Back

6   Qq 6, 71 Back

7   C&AG's Report, Dealing with the complexity of the benefits system, HC (Session 2005-06) 592 Back

8   Qq 4-5, 32, 56-58, 78, 83, 110-112, 115; C&AG's Report paras 1.3, 1.9 Back

9   C&AG's Report, International Benchmark of Fraud and Error in Social Security Systems, HC (Session 2005-06) 1387 Back

10   C&AG's Report, Department for Work and Pensions Resource Accounts 2004-05, HC 477, 2005-06 Back

11   Qq 13-18, 31, 66, 75, 88, 129-130, 140 Back

12   The C&AG considers a range of factors when determining whether to qualify his opinion on the accounts including the percentage of spend on irregular payments, but we are informed that 1%is not a rigid threshold for this decision.  Back

13   Qq 27-30, 125-127; C&AG's Report, para 1.1 Back